Is gold a commodity or a currency?

Is gold a commodity or a currency? The answer – technically speaking – is that it is both. Gold is definitely a commodity, but it can be used in some similar ways to a currency.

To understand how gold can be technically considered a currency, it is important to first define 'currency' and 'commodity'.

What is a currency?

According to Investopedia, a currency is '...a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.'

What is a commodity?

A commodity is a basic item that can be bought and sold and is interchangeable with other commodities of the same type. They are most often used as materials in the production of other goods or services.

The quality of a given commodity may differ slightly, but there are certain standards expected. These ensure that the goods are essentially the same, regardless of producer. That means to a trader, gold is gold: no matter where it was mined, or who mined it.

Is gold a commodity?

On the criteria above, gold meets all the requirements needed that we can say yes, gold is a commodity. Like silver and other precious metals, it is a basic metal element. As such it is described as being fungible – identical, and totally interchangeable.

Gold from across the world is used in the production of jewellery, electronics and a host of other applications. If any more proof were needed, it is also traded on the commodities market.

Is gold a currency?

Gold does not quite meet all of the above criteria needed to be considered a currency today, but was used as currency in most economies before the 20th century. Unlike fiat money and paper money, gold is no longer issued by governments, in circulating coins for example. It is however used as a medium of exchange, and can be a basis for trade.

Prior to the end of the gold standard in 1971, the US Dollar – the world's major currency – was fixed to the price of gold. In theory, it was exchangeable for gold. As such it could then have been classed as a currency.

Even now, governments, central banks and financial institutions continue to hold large reserves of gold as a store of wealth and for potential future exchange. Individual investors also hold gold as a long-term safe haven, hedge investment and a store of wealth. Ultimately this gold can be exchanged at commodity prices and used as a basis for trade.

Another argument for gold as a currency is the fact that some gold coins produced today are credited a face value. In the UK, The Royal Mint produces a number of gold coins which are technically legal tender. The gold Britannia and gold Sovereign, for example, have face values of £100 and £1 respectively. Their true value in gold weight is far higher, and they are not accepted in shops or banks, but they are considered legal tender, which technically makes them currency, and grants them a number of useful tax benefits.

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So, although gold is not strictly a currency, it can be used in many similar ways to fiat currencies. Indeed, some gold enthusiasts argue that gold – even after the abandonment of the gold standard – remains the only true, long-term international currency while also being traded as a commodity.